Tech layoffs at private companies are putting employee equity in limbo – Fortune

It was just about three weeks ago that the layoffs started to feel constant. Every day, more and more people are losing their jobs—from crypto companies like Coinbase or real estate groups like Compass or retail platforms like Stitch Fix.
More than 8,000 startup employees have been cut this month, per data. Let that sink in: In 15 days—in 11 working days—more than 8,000 people have lost their source of income: that they will have to find another way to fund their rent or mortgage, their doctor’s appointments, their children’s braces or softball registration fees. This is already touching people I know and care about, and it’s likely only the beginning.
To make matters worse, there’s a whole pool of capital that’s inaccessible right now: all the money tied up in private stock options.
“A lot of employees… Are now learning how things can go in a bit of a rougher patch,” says Jeremy Wright, co-head of global private markets for Morgan Stanley at Work, the division that helps venture-backed tech companies manage their cap tables and stock plans.
Equity has become a key means of attracting talent—what Wright refers to as “tablestakes.” Now that companies are staying private longer than they ever have before, and equity plans have become so popular, employees have racked up numbers of shares. But what those shares are now worth is an open question.
Due to soaring valuations in private companies pre-IPO, “some of this is uncharted territory for private company employees,” says Kevin Swan, who, co-heads the Morgan Stanley global private markets business with Wright. The National Center for Employee Ownership estimates that 32 million employees participate in an employee ownership plan (that includes public companies).
So far, only some private companies have voluntarily reset their own valuations—the public example of that being Instacart, which cut its valation to $24 billion—down from $39 billion earlier this year. But Wright says we should expect to see much more of this as the year goes on and companies are required to update their 409A valuations—meaning the value of common stock as determined by a third-party appraiser.
Formal secondary stock offerings have been few and far between in recent weeks, according to Wright. 
“There’s quite a divide right now—what investors or even a company buying back shares would expect versus what a shareholder or employee expects to sell for,” Wright says. “So there’s been a holding pattern there.”
Morgan Stanley’s stock plan business, which works with private tech companies from their Series A to IPO, says that some companies are still moving forward with liquidity events—things like a tender offer. But most of them are waiting to see how share prices settle out.
“Basically there’s a big gap between the bids and the offers,” Wright says.
For some who have taken big bets on the company they work for with their personal wealth, this could be very financially challenging. You may recall that fintech startup Bolt Financial released what it described as a “revolutionary” employee stock plan earlier this year, where its approximately 900 employees at the time could take out loans to exercise their options. As my colleague Shawn Tully described in February, the offering was eerily similar to the 2000s Conseco insurance disaster, where employees were left owing hundreds of millions of dollars. Business Insider recently reported that a Bolt Financial engineer had taken out a $100,000 loan from the company to purchase stock options. After being laid off, they’ll need to pay back the loan within 90 days.
Most employees won’t find themselves in such drastic circumstances—particularly as taking out these kinds of loans have become less popular after previous downturns. What may be more frequent is employees losing vested options they have built up in recent years. Typically, employees have about 30 to 60 days to exercise options once they part ways with the company, according to Wright. That could mean either forking over a sizable chunk of change after losing your job, or forfeiting the shares.
“We’re gonna see a lot of things be flipped on their head, in terms of where they want to go work and how they value that equity, because the pops that we saw in the last couple of years, we may not see again for a couple of years,” Wright says.
See you in Aspen… If you’re like me, it’s hard to keep up with everything happening in tech and the private markets these days. Let’s talk about it together at Fortune’s Brainstorm Tech July 11-13. Fortune will be hosting conversations about when the IPO market will re-open and where the opportunities lie in free-falling markets, and you can plan to hear from the likes of Isabelle Freidheim, CEO and Chairman of Athena SPACs; Sriram Krishnan, GP of a16z crypto; Lynn Martin, president of the NYSE Group; and Jonathan Kanter, Assistant Attorney General of the U.S. Department of Justice’s Antitrust Division, among many others. This is an invite-only conference, but Term Sheet readers get special consideration. You can register here.
See you tomorrow,
Jessica Mathews
Twitter: @jessicakmathews
Email: [email protected]
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